Educational Credits You Need to Know About Before Filing Your Taxes

• Author: Jenny Wolff
• Posted: 2024-10-12

There is no doubt that college is expensive. However, you can help to offset some of these costs slightly by taking advantage of the tax breaks aimed at higher education. Here is how you can leverage what you are paying for in education costs to yield more savings in your pocket come tax time.
 

American Opportunity Credit for College Costs

The American opportunity credit is the most obvious place to start if you are looking to reduce your tax liability. You can claim up to $2,500 if you are responsible for the first four years of college education or vocational school for yourself, a dependent, or a spouse. The student needs to be enrolled as at least a half-time student at a recognized institution of higher education in order to qualify for this credit.

The full credit is only awarded to those with a modified adjusted gross income (MAGI) of $80,000 or less for single filers or $160,000 or less for married couples filing jointly. From there, the credit amount is reduced up to a MAGI of less than $90,000 if filing as a single or $180,000 for those filing jointly. You can claim tuition and fees, books, and other supplies as eligible expenses.
 

Lifetime Learning Credit

The lifetime learning credit is designed to be applied for those Americans enrolled in graduate school or other types of adult continuing education. This credit is worth a 20% deduction of up to $10,000 in educational expenses, topping out at a maximum amount of $2,000 per tax filing. You do not receive more credits if you have more dependents in college.

The IRS has recently boosted the income limits for this credit, helping more Americans to become eligible. These limits are now the same as the parameters in place for the American opportunity credit. As the name implies, there is no limit to how many times you can claim this credit. The credit encompasses both graduate and undergraduate expenses as well as certification programs or other types of classes related to your career path. Unlike the American opportunity credit, you do not need to be enrolled for at least half time.
 

Student Loan Interest Deduction

Even if you are done with your higher education pursuits, there still may be tax deduction opportunities available to you. Those Americans in the process of paying back student loans may be eligible to deduct as much as $2,500 in interest. This interest deduction applies to yourself, a spouse, or a dependent. The deduction goes to the person legally responsible for paying the interest. However, the student is not eligible to receive the deduction if their parents are still claiming them as a dependent.

The MAGI limits for those filing in 2023 are less than $85,000 if single or head of household and $175,000 or less if married filing jointly. The maximum amount begins to phase out at MAGI levels of $70,000 or $145,000.
 

Understanding the New Secure Act 2.0

This is a good time to familiarize yourself with the new Secure Act 2.0. This legislation increases the options for Americans that have money that may have gone unused in a 529 plan. Beginning in 2024, Americans that are putting money into a 529 plan will be able to roll over any unused funds into Roth IRAs without incurring any tax penalties. While the beneficiary of the 529 plan must be listed as the owner on the Roth account, you can change this beneficiary to fit your needs.

There are some stipulations to this new legislation. The 529 plan needs to have been in place for at least 15 years for it to be eligible. In addition, you can only roll over funds that have been in the account for at least five years. Lastly, the amount rolled over cannot exceed the annual Roth IRA contribution limit. There is also a $35,000 lifetime cap for each beneficiary. Although there are some limitations to this legislation, it will certainly provide a beneficial option for those Americans lucky to have unused money in their 529 accounts.

Savvy investors understand the importance of uncovering any eligible tax deduction. Do not let these significant credits slip off your radar this year when you file your tax return.